Tanzania Investment and Consultant Group Ltd

| Economic Research Centre

Loan Interest Rates Decline Amid Improved Credit Risk in Tanzania
May 14, 2024  
Loan Interest Rates Decline Amid Improved Credit Risk in Tanzania The information provided pertains to the monitoring and performance of interest rates in a given financial market, presumably managed by the Central Bank. Here's a breakdown and more details on the different aspects mentioned: 7-day Interbank Cash Market (IBCM) Rate The IBCM rate is a […]

Loan Interest Rates Decline Amid Improved Credit Risk in Tanzania

The information provided pertains to the monitoring and performance of interest rates in a given financial market, presumably managed by the Central Bank. Here's a breakdown and more details on the different aspects mentioned:

7-day Interbank Cash Market (IBCM) Rate

The IBCM rate is a short-term interest rate at which banks lend to one another for a period of seven days. This rate is crucial as it reflects the liquidity conditions in the banking system and influences other interest rates in the economy.

  • Central Bank Rate (CBR): This is the benchmark interest rate set by the Central Bank, in this case, at 5.5% for the first quarter of 2024.
  • CBR Corridor: The Central Bank monitors the IBCM rate to ensure it remains within a band or corridor around the CBR. This corridor is +/-200 basis points, which means the IBCM rate should stay between 3.5% and 7.5%.
  • Recent Performance: In March 2024, the 7-day interest rate eased to 7.16%, down from 7.28% in February 2024. This indicates that the rate remained within the desired band set by the Central Bank.

Interest Rates on Loans

Interest rates on loans offered by banks have broadly declined compared to the rates from March 2023.

  • Credit Risk Improvement: The decline in loan interest rates is attributed to an improvement in credit risk. This is measured by the ratio of non-performing loans (NPLs), which fell to 4.3% in March 2024. This is below the Bank of Tanzania's tolerable threshold of 5%, indicating better loan repayment rates and lower risk.

Short-term and 12-month Deposit Rates

  • Short-term Interest Rate: The short-term interest rate for loans or deposits (typically less than one year) eased to an average of 16.17%.
  • 12-month Deposit Rate: The interest rate on deposits with a one-year maturity increased to an average of 8.94%.

Interest Rate Spread

The spread between the one-year lending rate and the deposit rate narrowed:

  • One-year Lending Rate vs. Deposit Rate: The spread reduced to 7.23 percentage points in March 2024 from 8.73 percentage points in March 2023. This narrowing spread indicates that while both lending and deposit rates have adjusted, the rates on deposits have increased more relative to the lending rates over the past year.

Central Bank's role in managing monetary policy and ensuring financial stability through the regulation of interest rates and monitoring of credit risks in the banking sector.

  • Economic Signals: The central bank's effective control of the IBCM rate within the desired band indicates a stable monetary policy environment.
  • Bank Lending and Borrowing: The decline in loan interest rates and the narrowing spread between lending and deposit rates suggest improved confidence in the banking sector and potentially more favorable conditions for borrowers.
  • Investment Environment: Higher deposit rates might encourage savings, while lower lending rates can stimulate borrowing and investment, contributing to economic growth.

Focusing on the interest rates and Tanzania's economic stability:

Central Bank Rate (CBR) and Interbank Cash Market Rate:

  • The Central Bank of Tanzania (BoT) set the CBR at 5.5% for Q1 2024.
  • The 7-day Interbank Cash Market (IBCM) rate remained within the CBR corridor of 3.5% to 7.5%, indicating effective monetary policy implementation. The rate eased to 7.16% in March 2024, down from 7.28% in February 2024.
  • Maintaining the IBCM rate within the target corridor shows the BoT's ability to manage short-term liquidity in the banking system, which is essential for economic stability.

Loan Interest Rates:

  • The decline in interest rates on loans compared to March 2023 suggests an improvement in lending conditions.
  • Lower loan interest rates can stimulate borrowing and investment by businesses and consumers, potentially boosting economic growth.

Credit Risk Improvement:

  • The reduction in the ratio of non-performing loans (NPLs) to 4.3% in March 2024, below the BoT's tolerable threshold of 5%, indicates improved credit risk management and a healthier banking sector.
  • A lower NPL ratio reflects better loan repayment rates, enhancing the stability and confidence in the financial system.

Short-term and 12-month Deposit Rates:

  • The short-term interest rate averaged 16.17%, showing a reduction, while the 12-month deposit rate increased to 8.94%.
  • Higher deposit rates can attract savings, providing banks with more funds to lend, while lower short-term borrowing costs can stimulate economic activity.

Interest Rate Spread:

  • The narrowing spread between one-year lending and deposit rates from 8.73 percentage points in March 2023 to 7.23 percentage points in March 2024 suggests a more competitive lending environment.
  • A reduced spread implies that banks might be lowering their profit margins on loans, potentially due to increased competition or improved economic conditions.

Economic Stability Indicators

Effective Monetary Policy:

  • The BoT's ability to keep the IBCM rate within the desired range indicates effective monetary policy, which is crucial for controlling inflation and ensuring economic stability.
  • By managing interest rates effectively, the BoT can influence economic activities such as investment, consumption, and savings, contributing to overall economic stability.

Banking Sector Health:

  • The decline in NPLs and improved credit risk environment suggest a robust and stable banking sector.
  • A stable banking sector is critical for economic stability as it ensures the smooth functioning of financial intermediation, which is essential for economic growth.

Encouraging Investment and Savings:

  • Lower loan interest rates can encourage borrowing for investment, leading to economic growth.
  • Higher deposit rates can encourage savings, providing a stable source of funding for banks and promoting financial stability.

Economic Growth Prospects:

  • Improved credit conditions, along with competitive lending and borrowing rates, indicate positive economic growth prospects.
  • As businesses and consumers find it more affordable to borrow, this can lead to increased investment in productive activities, job creation, and overall economic development.

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